Furniture Brands: This $1 Stock Could Surge With The Housing Turnaround Or A Short Squeeze

Shorts can make a lot of money by targeting a stock that looks weak. It's almost like watching a documentary on wild animals. A group of predators spots what appears to be weak prey, and the attack is on. Shorts pile in and that only causes more pain. But sometimes shorts go too far and the stock (or the prey) manages to get away from them, in what can turn into a reversal of fortune. Suddenly, the predators (or shorts), become the hunted. When this happens in a heavily shorted stock, the gains can be tremendous. In 2011, the shares of Headwaters (NYSE:HW) were beaten down to about $1 per share by shorts and investors who panicked and sold, but the shorts overplayed their hand and a massive rally has taken that stock from a 52-week low of $1.05 to about $7 today. Conns, Inc. (NASDAQ:CONN) was another example of a heavilyshorted and low-priced stock that shorts have experienced major losses in, as it has gone from a 52-week low of $5.94 to a recent high of $26.98.

There has been a recent rally in housingrelated stocks. For example, Toll Brothers, Inc., (NYSE:TOL) has jumped about 50% in the past couple of months, rising from around $24 in June to nearly $34 per share today. Another major homebuilder, Lennar Corp. (NYSE:LEN), has seen a similar run from about $24 in June, to $33.93 per share. Many other smaller companies in the housing sector have see a huge surge even though some of these companies are still reporting losses. For example, KB Home (NYSE:KBH) has nearly doubled recently, rising from about $6.50 per share to a recent $12.07. The bet against home building stocks has not paid off for shorts, in spite of what seemed like a sure bet. For example, KB Home currently has about 31 million shares short, and even as the company continues to report losses, investors who bought this stock in the single digits have profited.

With housing stocks in rally mode, it might be time to look at secondary plays. What's good for housing often ends up being good for furniture makers, since consumers usually buy new furniture after buying a new home. An uptick in new home sales is likely to result in improved furniture sales in the coming quarters. With that in mind, let's take a closer look at a $1 stock that could surge with a housing turnaround or a short squeeze:

Furniture Brands International, Inc.(FBN), designs, manufactures, and markets a wide range of furniture. While some investors might not be aware of this company, chances are good that they are familiar with the company's brands, which include Broyhill, Hickory, Thomasville, Drexel Heritage, Henredon, Lane Furniture, Pearson, La Barge, Lane Venture, and Maitland-Smith, among others. A number of these brands, such as Thomasville, Drexel Heritage and Henredon, are extremely well-known in the industry and just one of these brands could be worth more than the entire current market capitalization of this company which is now just about $57 million.

According to Shortsqueeze.com, there are about 3.6 million shares short, in this stock. Since it trades about 160,000 shares on an average volume day, this means it could take nearly 23 days worth of volume for shorts to cover. It's easy to see why shorts target this stock when it was trading at much higher prices, but at just about a buck, and with so many shorts making this a crowded trade, the risk of a significant short squeeze appears possible. The short case seems to be based on hopes that the furniture market will remain depressed and that this company will never see a turnaround. However, some better than expected news, a major short deciding to cover, the sale of one brand, a buyout, a return to profitability, or a number of other positive surprises could be a trigger for a major squeeze.

Since May of this year, the shares have drifted from as high as about $1.80 to the current level at close to $1. The June market correction seemed to take a toll on the stock, from which it has yet to recover. Mostly, it seems like impatient investors and shorts have been impacting the shares, with a slow drift lower, in recent weeks. As for financial results, the most recent conference call transcript from Seeking Alpha is worth reading. The company posted a second quarter loss of $6.8 million or 12 cents per share, which is similar to the net loss of $6.6 million or 12 cents per share in the second quarter of 2011. The company continues to implement cost-cutting measures and it is clearing out older inventory which is one reason why results could improve in the coming quarters. The company generated about $3.7 million of free cash flow in the second quarter alone, and it said in the conference call that it expects to generate positive cash flow for the rest of 2012. It has about $19.1 million in cash on the balance sheet, and around $29.7 million available to borrow, which gives it liquidity of nearly $50 million. The company had some backorders in the second quarter which could result in higher than expected sales for the third quarter. The company stated: "In total, our backlog was $19 million higher than last year as we exited the quarter." (Had those orders shipped in the second quarter, it's possible that the company would have reported a small profit for the quarter.) With the company forecasting positive cash flow for the rest of the year, and since it is entering the third quarter with a $19 million backlog of orders, this neglected stock might be poised to surprise to the upside.

One other positive worth pointing out is the potential for low-priced stocks to make outsized gains in a very short time. One of the best examples this year has been Sprint (NYSE:S), which has seen a double in the share price from about $2.25 per share in May to over $5, just recently. Low-priced stocks are often higher risk investments, but these risks also come with what might be higher rewards. There are clear risks in any stock, including Furniture Brands, which might continue to post losses, but at just about $1 per share, the potential gains might vastly outweigh these risks. Even large institutions can see the potential of investing in low-priced stocks.

It's worth noting that some well-known mutual funds that are focused on value stocks have taken significant positions in this company. For example, "Royce & Associates, LLC." owns about 3.8 million shares, or almost 7% of the company. "Oaktree Capital Management, LP", owns about 2.6 million shares, which is nearly a 5% stake in the company.

There are other furniture companies that could find the brands that this company owns to be attractive to acquire, either a single brand or the entire company. That could provide very strong short-term gains, a short squeeze could also occur, but in the long-term a turnaround is what could provide the most significant gains. This stock traded for over $40 per share in April of 2002, and more recently, in April 2010, it traded for $8.28 per share. That shows the type of rebound potential this stock could reward investors with, if a turnaround is successful.

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FBN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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